Last week QCOM reported Q3 results that were inline to slightly better than expectations, but the company issued revenue guidance for the current quarter and 2014 that was below consensus, sending the shares down nearly 4%. Since last week’s earnings gap, the stock is up nearly 8% from the lows, making new 52 week and 13 year highs, with the chart below showing no real technical resistance overhead till $80.
So why the change in sentiment in such a short period of time since earnings, a period that the Nasdaq composite is only up about 1%? In our earnings Cheat Sheet from Nov 6th, we highlighted QCOM’s annual analyst meeting on Nov 20th, as a potential catalyst for the shares. Yesterday Goldman Sachs raised their rating on the stock, adding it to their Conviction Buy list, which must be fairly reassuring to longs that it is no longer on the crappy ol’ buy list. As quoted by Barron’s Tech Trader Daily Blog, GS analyst Simona Jankowski that she expects the company to outline “a more consistent and structured capital allocation strategy,” beyond share repurchases, that will also continue growing its dividend, which she sees reaching 2.4% by March.”
While a dividend increase could clearly be in the cards, the current yield at 1.96% ain’t too shabby. And for those expecting some sort of share buy back info I wouldn’t hold your breath as they announced a new $5b share repurchase back in early Sept to replace their prior one that had been completed. The company has a pile of cash equaling 24% of their market cap and no debt. My sense would be that with earnings and sales expected to decelerate from the high teens to the high single digits the company would probably be best suited in holding onto that cash to make a sort of trans-formative acquisition of some kind to reinvigorate growth as the high-end smartphone market gets more and more saturated.
So if traders are buying the shares for some sort of massive capital reallocation plan they maybe a little disappointed of the analyst day (coming 2 weeks after their earnings report) if it lacks any new real big announcements.
The recent breakout above $70.50 should serve as neat term support, but a failed breakout would make a move back to the 50 day moving average (around $68.40-purple line below) fairly likely and place the $66 level, last week’s low back in play.
Its our sense that the stock likely consolidates after the event, and we want to define a range where we think we have a high probability of making money selling the range for the analyst meeting. So here’s the trade:
TRADE: QCOM ($71.25) Bought Nov 22nd (Next Friday) 67/70/73 Call Butterfly for 1.25
-Bought 1 Nov 22nd 67 Call for 4.40
-Sold 2 Nov 22nd 70 Calls at 1.75 each or 3.50 total
-Bought 1 Nov 22nd 73 Call for .35
Break-Even on Nov 22nd Expiration:
Profits: btwn 68.25 and 71.75 make up to 1.75, max gain of 1.75 at 70
Losses: btwn 67 and 68.25 lose up to 1.25, btwn 71.75 and 73 lose up to 1.25, max loss of 1.25 below 67 and above 73
Trade Rationale: This is basically drawing a line in the sand above where the stock is trading following its recent run, with the thought that any pullback from this level is not likely to be severe. The greatest risk to this structure is if the stock follows through to the upside into or on the heels of its analyst meeting.